You’d be hard-pressed to find a public pension program with the kind of outperformance
Matt Clark has achieved at the South Dakota
Investment Council (SDIC). Clark has been
involved with South Dakota’s pension programs
for 34 years, working his way up after starting
as an intern just out of business school. Under
Clark’s leadership, the pension has ranked in the
top 1% of performance over the past 20 years.

The $10.5 billion retirement system is known
as an ultra-long-term investor, and Clark has made
it his mission to ensure that the pension maintains
investment discipline above all else—a mission he
says makes him a contrarian among his pension
peers (we say innovator).

“I think if you’re focused on long-terminvesting, by definition you are a contrarianbecause the market is focused on the short-term,”Clark tells CIO. “You have to be willing to rejectconcern for the short-term to succeed as a long-term investor.”Clark and his team manifest their long-terminvesting vision by managing a large portion ofthe pension assets in-house. Much of the retire-ment system’s investments in public markets arehandled by an internal investment team thathas been with the pension for decades. Overhis tenure, Clark has developed a reputation forfinding and hiring skilled investment managersthat stick with the pension because of the long-term strategy and unique compensation package.

“Our incentive-based compensation has beenkey to our ability to innovate. We reward peoplewho stick with us and are willing to ride outsome pain to succeed over the long term,” Clarksays. “That style of compensation isn’t commoneverywhere, but it’s helped us to grow a strongteam in-house.”SDIC takes an active management approachto the portfolio—making opportunistic invest-ments as market conditions change. SDIC’s longinvestment horizon puts an embedded value tilt onthe portfolio that Clark says has helped with thepension’s outperformance.

When energy prices tanked in 2014, for
example, SDIC built up significant positions in
distressed high-yield energy debt and held on to it.
At one point, distressed energy investments made
up as much as 9% of the portfolio, spread across
oil, natural gas, and coal debt. Those bets paid off
and the pension has been steadily exiting its investments at a profit as energy prices have rebounded
over the past year.

While the rally has boosted investment
returns for SDIC, a new painful period may be
on the way. Frothy valuations are making it hard
for Clark and his team to find new value opportunities. Some investors in Clark’s position might
be alarmed at having cash on the sidelines, but
in many ways, he’s in his element. Clark and his
team are on the hunt for their next big idea. He
says the pension can ride out these cycles and
invest smartly when the time comes—a luxury
few pensions have.

“When you look at the pension space broadly,
there is a lot of distress,” he says, noting that
many pensions are changing plan designs in
response to underfunding and other headwinds.
“The South Dakota plan has always been focused
on discipline in making the right contributions
and investing for the long term. I think we are
well placed to be a survivor.” —Bailey McCann